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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-19462
ARTISOFT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0446453
(State or other jurisdiction (IRS employer
of incorporation) identification number)
5 Cambridge Center
Cambridge, MA 02142
(617) 354-0600
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(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (November 13, 2000).
Common stock, $.01 par value: 15,684,461 shares
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<PAGE>
ARTISOFT, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-
September 30, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations-
Three Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows-
Three Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
Item 2(a). Quantitative and Qualitative Disclosures
about Market Risk 17-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote by Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBITS
11 Computation of Net Income Per Share 20
27 Financial Data Schedule 21
2
<PAGE>
ARTISOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, June 30,
ASSETS 2000 2000
------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 5,485 $ 5,120
Short term investments 1,479 2,490
Receivables:
Trade accounts, net 1,049 1,511
Other receivables 125 146
Inventories 1,179 808
Prepaid expenses 625 366
------------ ------------
Total current assets 9,942 10,441
------------ ------------
Long term investments 7,797 7,797
Property and equipment 2,765 2,353
Less accumulated depreciation and amortization (1,310) (1,140)
------------ ------------
Net property and equipment 1,455 1,213
------------ ------------
Other assets 217 179
Net assets from discontinued operations -- 1,864
------------ ------------
$ 19,411 $ 21,494
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 958 $ 928
Accrued liabilities 2,057 1,937
Deferred revenue 87 41
------------ ------------
Total current liabilities 3,102 2,906
------------ ------------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $1.00 par value
Authorized 11,433,600 shares; none issued -- --
Common stock, $.01 par value. Authorized
50,000,000 shares; issued 28,992,030
shares at September 30, 2000 and
28,742,744 at June 30, 2000 290 287
Additional paid-in capital 102,129 101,363
Accumulated deficit (16,326) (13,278)
Less treasury stock, at cost, 13,320,500 shares
at September 30, 2000 and June 30, 2000 (69,784) (69,784)
------------ ------------
Total shareholders' equity 16,309 18,588
------------ ------------
$ 19,411 $ 21,494
============ ============
See accompanying notes to condensed consolidated financial statements.
4
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ARTISOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
September 30,
----------------------
2000 1999
-------- --------
(unaudited)
Net sales $ 2,221 $ 2,721
Cost of sales 604 1,268
-------- --------
Gross profit 1,617 1,453
-------- --------
Operating expenses:
Sales and marketing 2,433 1,455
Product development 1,262 746
General and administrative 1,159 908
-------- --------
Total operating expenses 4,854 3,109
-------- --------
Loss from operations (3,237) (1,656)
Other income, net 189 187
-------- --------
Net loss from continuing operations (3,048) (1,469)
Income from discontinued operations, net of tax -- 987
-------- --------
Net loss $ (3,048) $ (482)
======== ========
Net loss per common share from continuing
operations-Basic and Diluted $ (.20) $ (.10)
-------- --------
Net loss per common share-Basic and Diluted $ (.20) $ (.03)
======== ========
Weighted average common shares outstanding-
Basic and Diluted 15,591 14,834
======== ========
See accompanying notes to condensed consolidated financial statements.
4
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ARTISOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,048) $ (482)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 192 157
Gain from disposition of property, net -- 3
Change in accounts receivable and inventory allowances 78 (29)
Changes in assets and liabilities:
Receivables:
Trade accounts 416 978
Other receivables 21 (47)
Inventories (403) (20)
Prepaid expenses (259) (170)
Accounts payable, accrued liabilities and deferred revenue 196 (92)
Net assets from discontinued operations 1,864 (948)
Other assets (61) (1)
-------- --------
Net cash used in operating activities (1,004) (651)
-------- --------
Cash flows from investing activities:
Proceeds from sale of investment securities 1,011 --
Purchases of property and equipment (411) (88)
-------- --------
Net cash provided by (used in) investing activities 600 (88)
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of stock options 769 42
-------- --------
Net cash provided by financing activities 769 42
-------- --------
Net increase (decrease) in cash and cash equivalents 365 (697)
Cash and cash equivalents at beginning of period 5,120 16,148
-------- --------
Cash and cash equivalents at end of period $ 5,485 $ 15,451
======== ========
</TABLE>
Note: During the three months ended June 30, 2000 the Company invested $10.3
million of its cash and cash equivalents in short term and long term investment
securities.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
ARTISOFT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except percentages, shares and per share amounts)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Artisoft, Inc. and its three wholly-owned subsidiaries: Triton Technologies,
Inc., Artisoft "FSC", Ltd. (which has elected to be treated as a foreign sales
corporation), and NodeRunner, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the financial results for the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 2000 Annual Report on
Form 10-K. The results of operations for the three months ended September 30,
2000 are not necessarily indicative of the results to be expected for the full
year.
(2) COMPUTATION OF NET LOSS PER SHARE
Basic loss per share is computed by dividing loss attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock that then shared in the earnings (loss) of the
Company. In calculating net loss per common share for the three month periods
ended September 30, 2000 and 1999, 590,371 and 666,724 shares, respectively, of
anti-dilutive common stock equivalent shares consisting of stock options have
been excluded because their inclusion would have been anti-dilutive.
(3) DISCONTINUED OPERATIONS
In September 1999, the Company announced its intention to investigate the
potential separation of its two business units: the Communications Software
Group (CSG) and the Computer Telephony Group (CTG). On June 2, 2000, the Company
signed a definitive agreement to sell the CSG assets to Prologue Software Group
for approximately $3.0 million (including accounts receivable). The sale was
closed effective June 30, 2000. Thus the Company has reclassified the
accompanying consolidated balance sheets, statements of operations and
statements of cash flows of CSG to Discontinued Operations.
6
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The following is a summary of the operating results of the Discontinued
Operations for the three month period ended September 30, 1999 (in thousands):
Three Months Ended
September 30,
1999
-------
Net sales $ 3,680
Cost of sales 954
-------
Gross profit 2,726
-------
Operating expenses 1,739
-------
Net income $ 987
=======
(4) INVENTORIES
Inventories at September 30, 2000 and June 30, 2000 consist of the
following:
September 30, June 30,
2000 2000
------- -------
Raw materials $ 577 $ 487
Finished goods 863 550
------- -------
1,440 1,037
Inventory allowances (261) (229)
------- -------
$ 1,179 $ 808
======= ========
(5) PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2000 and June 30, 2000 consist of
the following:
September 30, June 30,
2000 2000
------- -------
Furniture and fixtures $ 40 $ 39
Computers and other equipment 2,443 2,035
Leasehold improvements 282 279
------- -------
2,765 2,353
Accumulated depreciation and
amortization (1,310) (1,140)
------- -------
$ 1,455 $ 1,213
======= =======
7
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(6) OTHER ASSETS
Other assets at September 30, 2000 and June 30, 2000 consist of the
following:
September 30, June 30,
2000 2000
-------- --------
Purchased technology, net of accumulated
amortization of $396 and $374 $ 41 $ 63
Recoverable deposits and other 176 116
-------- --------
$ 217 $ 179
======== ========
(7) ACCRUED LIABILITIES
Accrued liabilities at September 30, 2000 and June 30, 2000 consist of the
following:
September 30, June 30,
2000 2000
-------- --------
Compensation and benefits $ 819 $ 1,032
Payroll, sales and property taxes 39 33
Marketing 741 374
Royalties 112 334
Other 346 164
-------- --------
$ 2,057 $ 1,937
======== ========
8
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ARTISOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES. Net sales decreased 18% to $2.2 million for the quarter ended
September 30, 2000 from $2.7 million for the quarter ended September 30, 1999.
The decrease in net sales for the quarter ended September 30, 2000 as compared
to the quarter ended September 30, 1999 was due to the discontinuation of sales
of the Company's Visual Voice product line. During the quarter ended December
31, 1999, Intel Corporation purchased the Company's Visual Voice source code for
$2.7 million. Intel Corporation also agreed to pay the Company $1.5 million in
professional service fees associated with support and services provided to Intel
Corporation and the existing Visual Voice customers between October 1, 1999 and
June 30, 2000. These revenues were recognized ratably between October 1, 1999
and June 30, 2000. The Company agreed to discontinue selling the Visual Voice
product line as of June 30, 2000. The decrease in overall revenues caused by the
discontinuation of Visual Voice was partially offset by increased sales of the
Company's TeleVantage product line between the quarter ended September 30, 1999
and September 30, 2000.
The Company distributes its products internationally and tracks sales by
major geographic area. Non-U.S. sales represented 17% and 9% of total net sales
for the quarters ended September 30, 2000 and 1999, respectively. The percentage
increase in international sales is due primarily to sales made to ALR (a
European TeleVantage distributor) during the quarter ended September 30, 2000.
International sales increased 100% to $.4 million for the quarter ended
September 30, 2000 from $.2 million for the quarter ended September 30, 1999.
GROSS PROFIT. The Company's gross profit was $1.6 million for the quarter
ended September 30, 2000 and $1.5 million for the quarter ended September 30,
1999 or 73% and 53% of net sales, respectively. The increase in gross profit
percentage for the quarter ended September 30, 2000 as compared to the quarter
ended September 30, 1999 was due to the discontinuation of Visual Voice hardware
sales and lower sales of TeleVantage Not For Resale Kits (NFR's) associated with
the Company's development of its TeleVantage reseller channel. Gross profit may
fluctuate on a quarterly basis because of product mix, pricing actions and
changes in sales and inventory allowances.
SALES AND MARKETING. Sales and marketing expenses were $2.4 million for the
quarter ended September 30, 2000 and $1.5 million for the quarter ended
September 30, 1999, representing 110% and 53% of net sales, respectively. The
increase in sales and marketing expenses in aggregate dollars for the quarter
ended September 30, 2000 compared to the same period in fiscal 2000 was due
principally to increased expenditures on the sales and marketing infrastructure
for the Company's TeleVantage product line. The increase in sales and marketing
expenses as a percentage of sales for the quarter ended September 30, 2000
compared to the same period in fiscal 2000 is due to the overall decrease in net
sales for the quarter ended September 30, 2000 and the aforementioned increase
in sales and marketing infrastructure expense.
PRODUCT DEVELOPMENT. Product development expenses were $1.3 million for the
quarter ended September 30, 2000 and $.7 million for the quarter ended September
30, 1999, representing 57% and 27% of net sales, respectively. The increase in
aggregate product development expenses for the quarter ended September 30, 2000
compared to the same period in fiscal 2000 is principally attributable to the
addition of product development resources. The addition of new development
personnel to the Computer Telephony Group during the quarter ended September 30,
2000 was required to meet planned future product introduction timetables.
Specifically, the Company has added development personnel in advance of the
expected future release of TeleVantage 4.0, its flagship product and current
development efforts associated with the anticipated future release of Intel's CT
Media product line. The increase in product development expenses as a percentage
of net sales for the quarter ended September 30, 2000 compared to the same
period in fiscal 2000 is principally due to the overall decrease in net sales
between the two periods and the aforementioned increase in expenses associated
with the addition of new product development personnel. The Company believes the
introduction of new products to the market in a timely manner is critical to its
future success.
9
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.2
million for the quarter ended September 30, 2000 and $ .9 million for the
quarter ended September 30, 1999, representing 52% and 33% of net sales,
respectively. The increase in aggregate general and administrative expenses for
the quarter ended September 30, 2000 compared to the same period in fiscal 2000
is principally the result of additional occupancy costs incurred subsequent to
the expansion of the Company's Cambridge, Massachusetts-based headquarters and
increased depreciation expense on the Company's fixed assets in its Cambridge,
Massachusetts headquarters. The increase in general and administrative costs as
a percentage of net sales for the quarter ended September 30, 2000 compared to
the same period in fiscal 2000 is principally due to the overall decrease in net
sales between the two periods.
OTHER INCOME, NET. For the quarter ended September 30, 2000, other income,
net, increased to $189,000, from $187,000 in the corresponding quarter of fiscal
2000. The increase for the quarter ended September 30, 2000 resulted principally
from the receipt of increased interest income on the Company's cash and
investment balances.
FUTURE RESULTS
The Company intends to continue to increase its investments and
expenditures in sales, marketing and development of its software-based phone
system, TeleVantage. The Company will likely see increased operating
expenditures over the next several quarters as it completes planned development,
marketing and sales personnel expansion efforts for its TeleVantage product
line. With these planned headcount increases and increases in rental rates, the
Company will see increased occupancy expenses associated with its Cambridge,
Massachusetts corporate headquarters.
In December 1999, the Company executed an Intellectual Property (IP)
Purchase Agreement with Dialogic (an Intel Company). The Company agreed to sell
its Visual Voice source code to Dialogic (an Intel Company) for consideration of
$2.7 million. The $2.7 million was paid to Artisoft upon execution of the
agreement on December 30, 1999. Dialogic (an Intel Company) also agreed to allow
the Company to continue to sell its Visual Voice software until June 30, 2000
royalty free up to a maximum of $1.4 million in sales per quarter. Subsequent to
June 30, 2000 the Company will be required to pay a royalty to Intel Corporation
on all sales of Visual Voice software. Intel also agreed to pay the Company $1.5
million in professional services revenue. The Company recognized $1.4 million of
Visual Voice source code sale and professional services revenue during each of
the quarters ended December 31, March 31 and June 30. Effective June 30, 2000,
Dialogic (an Intel Company) has formally discontinued Visual Voice and the
Company is no longer authorized to sell, market or support the product line.
Approximately 50% of the Company's revenues in fiscal 2000 were attributable to
Visual Voice sales or Visual Voice source code acquisition revenue or Visual
Voice professional fees. The loss of this revenue stream along with expected
increases in operating expenses will likely lead to increased operating losses
and lower gross profits during fiscal 2001.
In December 1999, the Company executed a strategic partnership with
Dialogic (an Intel Company). Under the terms of the agreement, the Company is
required to provide Dialogic (an Intel Company) with a software-based phone
system that is compatible with Intel Corporation's CT Media Server.
In January 2000, the Company executed a strategic partnership with TAIS
intended to allow the Company and TAIS to deliver an integrated communications
server and software-PBX solution for small and midsized businesses. Under the
terms of the agreement, TAIS will invest in licenses of TeleVantage for
customized versions of the software product to be integrated with its computer
telephony systems and communications server product offerings. The Company will
be required to meet certain development milestones in providing the customized
software to TAIS. TAIS acquired 100,000 shares of Artisoft common stock at a
price of $6.994 per share and has the right to acquire an additional 50,000
shares pursuant to a warrant agreement. Additionally, the Company authorized
TAIS to purchase an additional 1,350,000 shares of the Company's common stock on
the open market. Toshiba is not contractually or in any other way required to
purchase shares on the open market. The Company incurred a non-cash charge of
approximately $2.3 million dollars on the issuance of these securities, which
was recognized as selling expense during the quarter ended March 31, 2000.
10
<PAGE>
The failure of the Company to successfully meet its development milestones
on either one of these key strategic agreements may have an adverse effect on
the Company's anticipated future revenues from TeleVantage. The Company's
ability to significantly expand its selling and marketing of TeleVantage to a
broad customer base may depend on its ability to successfully execute these two
key strategic agreements. The failure of one or both of these partnerships or
the Company's inability to continue to develop future strategic partnerships
could adversely effect the Company's operating results.
The Company's future results of operations involve a number of risks and
uncertainties. Among the factors that could cause future results to differ
materially from historical results are the following: business conditions and
the general economy; business and technological developments in the emerging and
rapidly changing software-based PBX market; competitive pressures, acceptance of
new products and price pressures; availability of third party compatible
products at reasonable prices; risk of nonpayment of accounts receivable; risk
of product line or inventory obsolescence due to shifts in technologies or
market demand; timing of software introductions; and litigation.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $5.5 million at September 30,
2000 compared to $5.1 million at June 30, 2000 and working capital of $6.8
million at September 30, 2000 compared to $7.5 million at June 30, 2000. The
increase in cash and cash equivalents of $.4 million was the result of the
liquidation of certain short term investments and the conversion of a portion of
these proceeds into cash and cash equivalents. The decrease in the Company's
working capital of $.7 million was primarily the result of a decrease in trade
receivables due to lower net sales achieved during the quarter ended September
30, 2000 as compared to the quarter ended June 30, 2000. Additionally, the
aformentioned reduction in short term investments also contributed to the
decrease in working capital.
The Company funds its working capital requirements primarily through cash
flows from operations and existing cash balances. While the Company anticipates
that existing cash balances and cash flows from operations will be adequate to
meet the Company's current and expected cash requirements for at least the next
year, additional investments by the Company to acquire new technologies and
products or loss of revenues from disposed business segments could necessitate
that the Company seek additional debt or equity capital. In addition, the
Company may also from time to time seek debt financing or solicit equity
investments for various business reasons. There can be no assurance that any
such additional debt financing or equity capital will be available when needed
or, if available, will be on satisfactory terms. The issuance of additional
equity securities may result in substantial dilution.
SHORT TERM AND LONG TERM INVESTMENTS
The Company had short and long term investment balances of $9.3 million at
September 30, 2000 compared to $10.3 million at June 30, 2000. The decrease in
overall investment balances at September 30, 2000 compared to June 30, 2000 is
due to the liquidation of some of these securities into cash in order to fund
operations. The Company purchased various AAA rated intermediate term securities
during fiscal 2000. All of these securities mature by December 31, 2005.
Securities with maturities between 91 days and 1 year are classified as short
term. Those securities with maturities of 366 days or greater are classified as
long term investments at September 30, 2000 and June 30, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation (an interpretation of APB Opinion No. 25). This interpretation
provides guidance regarding the application of APB Opinion 25 to Stock
Compensation involving employees. This interpretation is effective July 1, 2000
and does not have a material effect on the Company's financial statements.
11
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income (loss) depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction involved. The Company does not expect that adoption of SFAS
No. 133 will have a material impact on its consolidated financial position or
results of operations as the Company does not currently hold any derivative
fianancial instruments.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-K may contain forward-looking statements that involve risks
and uncertainties, including, but not limited to, the impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts and other risks detailed from
time to time in the Company's Securities and Exchange Commission filings. The
Company filed its fiscal 2000 Form 10-K on September 22, 2000.
RISK FACTORS
GENERAL
COMPETITION. The computer telephony industry is highly competitive and is
characterized by rapidly evolving industry standards. The Company competes with
other phone system companies, many of which have substantially greater
financial, technological, production, sales and marketing and other resources,
as well as greater name recognition and larger customer bases, than the Company.
As a result, these competitors may be able to respond more quickly and
effectively to new or emerging technologies and changes in customer requirements
or to devote greater resources to the development, promotion, sales and support
of their products than the Company. The Company's new product introductions can
be subject to severe price and other competitive pressures. While the Company
endeavors to introduce its products to the marketplace in a timely manner there
can be no assurances that due to the greater financial resources of the
Company's competitors that these products will be successful or even accepted.
There can be no assurance that the Company's products will be able to compete
successfully with other products offered presently or in the future by other
vendors.
NEW INDUSTRY DEVELOPMENT. The Company's principal product, TeleVantage,
competes in the newly emerging software-based phone system market.
Software-based phone systems operate in conjunction with and are affected by
developments in other related industries. These industries include highly
developed product markets, such as PCs, PC operating systems and servers,
proprietary PBX and related telephone hardware and software products, and
telephone, data and cable transmission systems, as well as new emerging products
and industries, such as Internet communications and Internet Protocol ("IP")
telephony. All of these industries and product markets are currently undergoing
rapid changes, market evolution and consolidation. The manner in which these
industries and products evolve, including the engineering- and market-based
decisions that are made regarding the interconnection of the products and
industries, will affect the opportunities and prospects for TeleVantage.
TeleVantage competes directly with other software-based phone system solutions
as well as existing traditional, proprietary hardware solutions offered by
companies such as Avaya Communications, Nortel and Siemens. While the Company
anticipates a migration toward software-based phone system solutions, there can
be no assurances that this will occur at the rate that the Company anticipates.
12
<PAGE>
PRODUCT RETURNS AND ROTATIONS. The Company is exposed to the risk of
product returns and rotations from its distributors and value added resellers,
which are estimated and recorded by the Company as a reduction in sales.
Although the Company attempts to monitor its reseller and distributor
inventories to be consistent with current levels of sell through, localized
overstocking may occur with TeleVantage due to rapidly evolving market
conditions. In addition, the risk of product returns and rotations may increase
if the demand for its existing products should rapidly decline due to regional
economic troubles or increased competition. Although the Company believes that
it provides adequate allowances for product returns and rotations, there can be
no assurance that actual product returns and rotations will not exceed the
Company's allowances. Any product returns and rotations in excess of recorded
allowances could result in a material adverse effect on net sales and operating
results. As the Company introduces more new products, the predictability and
timing of sales to end users and the management of returns to the Company of
unsold products by distributors and volume purchasers becomes more complex and
could result in material fluctuations in quarterly sales and operating results.
FACTORS AFFECTING PRICING. Substantially all of the Company's revenue in
each fiscal quarter results from orders booked in that quarter. A significant
percentage of the Company's bookings and sales to distributors and value added
resellers historically have occurred during the last month of the quarter and
are concentrated in the latter half of that month. Orders placed by distributors
are typically based upon distributors' recent historical and forecasted sales
levels for Company products and inventory levels of Company products desired to
be maintained by those distributors at the time of the orders. Moreover, orders
may also be based upon financial practices by distributors designed to increase
the return on investment or yield on the sales of the Company's products to
value-added resellers or end-users. Major distribution customers occasionally
receive market development funds from the Company for purchasing Company
products and from time to time extended terms, in accordance with industry
practice, depending upon competitive conditions. The Company currently does not
offer any cash rebates to its U.S. distribution partners. Changes in purchasing
patterns by one or more of the Company's distributors, changes in distributor
policies pertaining to desired inventory levels of Company products,
negotiations of market development funds and changes in the Company's ability to
anticipate in advance the product mix of distributor orders could result in
material fluctuations in quarterly operating results.
PRODUCT CONCENTRATION. The Company has in the past derived, and anticipates
that it will in the future derive, a significant portion of its revenues from
one product line. Declines in the revenues from this software product, whether
as a result of competition, technological change, price pressures or other
factors, could have a material adverse effect on the Company's business, results
of operations and financial condition. Further, life cycles of the Company's
products are difficult to estimate due in part to the recent emergence of
certain of the Company's products, the effect of new products or product
enhancements, technological changes in the software industry in which the
Company operates and future competition. There can be no assurance that the
Company will be successful in maintaining market acceptance of its key current
products or any new products or product enhancements.
TECHNOLOGICAL CHANGE. The markets for computer telephony solutions are
characterized by rapid technological change, changing customer needs, frequent
product introductions and evolving industry standards. The introduction of
products incorporating new technologies and the emergence of new industry
standards could render the Company's existing products obsolete and
unmarketable. The Company's future success will depend upon its ability to
develop and introduce new computer telephony products (including new releases
and enhancements) on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing new computer telephony products
that respond to technological changes or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, or
that its new products will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce new computer telephony products in a
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timely manner in response to changing market conditions or customer
requirements, the Company's business, results of operations and financial
condition could be adversely affected.
POTENTIAL FOR UNDETECTED ERRORS. Software products as complex as those
offered by the Company may contain undetected errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new or existing products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance or the
recall of such products, which could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides customer support for most of its products. The Company will in the
future offer new products. If these products are flawed, or are more difficult
to use than traditional Company products, customer support costs could rise and
customer satisfaction levels could fall.
HARDWARE AVAILABILITY AND QUALITY. The Company's computer telephony
software requires the availability of certain hardware. Specifically, the
TeleVantage software-based phone system operates on certain voice processing
boards manufactured by Dialogic (an Intel Company). To the extent that these
boards become unavailable or in short supply the Company could experience delays
in shipping software-based phone systems to its customers, which may have a
material adverse affect on the Company's future operating results. In addition,
the Company is dependent on the reliability of this hardware and to the extent
the hardware has defects it will impact the performance of its own
software-based phone system. To the extent, that the hardware becomes unreliable
or does not perform in a manner that is acceptable to the Company's customers,
the Company could experience a material adverse impact on its future operating
results. Such delays or quality problems if encountered could also cause damage
to the Company's reputation for delivering high quality, reliable computer
telephony solutions.
INTELLECTUAL PROPERTY RIGHTS. The Company's success is dependent upon its
software code base, its programming methodologies and other intellectual
properties. To protect its proprietary technology, the Company relies primarily
on a combination of trade secret laws and nondisclosure, confidentiality, and
other agreements and procedures, as well as copyright and trademark laws. These
laws and actions may afford only limited protection. There can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
of its proprietary information, or to prevent the successful assertion of an
adverse claim to software utilized by the Company, or that the Company will be
able to detect unauthorized use and take effective steps to enforce its
intellectual property rights. The Company owns United States and foreign
trademark registrations for certain of its trademarks. In addition, the Company
has applied for trademark protection on a number of its recently introduced new
technologies. In selling its products, the Company relies primarily on "shrink
wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. In addition, the laws of
some foreign countries provide substantially less protection to the Company's
proprietary rights than do the laws of the United States. Trademark or patent
challenges in such foreign countries could, if successful, materially disrupt or
even terminate the Company's ability to sell its products in such markets. There
can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology. Although the Company believes that its services and
products do not infringe on the intellectual property rights of others, such
claims have been and in the future may be asserted against the Company. The
failure of the Company to protect its proprietary property, or the infringement
of the Company's proprietary property on the rights of others, could have a
negative impact on the Company's business, results of operations and financial
condition.
DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends in
significant part upon key technical and senior management personnel. The Company
is dependent on its ability to identify, hire, train, retain and motivate high
quality personnel, especially highly skilled engineers involved in the ongoing
research and development required to develop and enhance the Company's software
products and introduce enhanced future products. A high level of employee
mobility and aggressive recruiting of skilled personnel characterize the
industry. There can be no assurance that the Company's current employees will
continue to work for the Company or that the Company will be able to hire
additional employees on a timely basis. Loss of services of existing key
employees or failure to timely hire new key employees could have a negative
impact on the Company's business, results of operations and financial condition.
The Company expects to grant additional stock options and provide other forms of
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incentive compensation to attract and retain key technical and executive
personnel. These additional incentives will lead to higher compensation costs in
the future and may adversely effect the Company's future results of operations.
The Company has experienced and expects to continue to experience difficulty in
hiring key technical personnel in certain of its key development offices. These
difficulties could lead to higher compensation costs and may adversely effect
the Company's future results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's operating
results have in the past fluctuated, and may in the future fluctuate, from
quarter to quarter, as a result of a number of factors including, but not
limited to, changes in pricing policies or price reductions by the Company or
its competitors; variations in the Company's sales channels or the mix of
product sales; the timing of new product announcements and introductions by the
Company or its competitors; the availability and cost of supplies; the financial
stability of major customers; market acceptance of new products and product
enhancements; the Company's ability to develop, introduce and market new
products, applications and product enhancements; the Company's ability to
control costs; possible delays in the shipment of new products; the Company's
success in expanding its sales and marketing programs; deferrals of customer
orders in anticipation of new products, product enhancements or operating
systems; changes in Company strategy; personnel changes; and general economic
factors. The Company's software products are generally shipped as orders are
received and accordingly, the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent primarily on orders
booked and shipped in that quarter and are not predictable with any degree of
certainty. In addition, the Company's expense levels are based, in part, on its
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. The Company's net income
may be disproportionately affected by a reduction in revenues because of fixed
costs related to generating its revenues. These or other factors may influence
quarterly results in the future and, accordingly, there may be significant
variations in the Company's quarterly operating results. The Company's
historical operating results are not necessarily indicative of future
performance for any particular period. Due to all of the foregoing factors, it
is possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock is likely to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in management, announcements
of technological innovations or new products by the Company, its customers or
its competitors, legislative or regulatory changes, general trends in the
industry and other events or factors. The stock market has experienced extreme
price and volume fluctuations which have particularly affected the market price
for many high technology companies similar to the Company and which have often
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. Further, factors such as announcements of new strategic
partnerships or product offerings by the Company or its competitors and market
conditions for stocks similar to that of the Company could have significant
impact on the market price of the Common Stock.
POSSIBLE ACQUISITIONS OR DIVESTITURES. From time to time, the Company may
consider acquisitions of or alliances with other companies that could complement
the Company's existing business, including acquisitions of complementary product
lines. Although the Company may periodically discuss such potential transactions
with a number of companies, there can be no assurance that suitable acquisition,
alliance or purchase candidates can be identified, or that, if identified,
acceptable terms can be agreed upon or adequate and acceptable financing sources
will be available to the Company or purchasers that would enable them to
consummate such transactions. Even if an acquisition or alliance is consummated,
there can be no assurance that the Company will be able to integrate
successfully such acquired companies or product lines into its existing
operations, which could increase the Company's operating expenses in the
short-term and materially and adversely affect the Company's results of
operations. Moreover, certain acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and amortization of expenses related to goodwill and intangible
assets, all of which could adversely affect the Company's profitability.
Acquisitions, alliances and divestitures involve numerous risks, such as the
diversion of the attention of the Company's management from other business
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concerns, the entrance of the Company into markets in which it has had no or
only limited experience, unforeseen consequences of exiting from product markets
and the potential loss of key employees of the acquired company, all of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPUTER TELEPHONY
COMPUTER TELEPHONY PRODUCT MARKET. The market for open, standards-based
computer telephony products is relatively new and is characterized by the rapid
evolution of hardware and software standards, emerging technologies and changing
customer requirements. These characteristics may render the Company's computer
telephony products unmarketable or may make the expansion, timing and direction
of product development unpredictable. As a result of these factors, there can be
no assurance that computer telephony markets will continue to expand, or that
the Company's products will achieve market acceptance.
The Company believes that the principal competitive factors affecting the
computer telephony markets it serves include vendor and product reputation,
product architecture, functionality and features, scalability, ease of use,
quality of product and support, performance, price, brand name recognition and
effectiveness of sales and marketing efforts. There can be no assurance that the
Company can maintain and grow its market position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other competitive resources. Any failure by the
Company to maintain and grow its competitive position could have a material
adverse effect upon the Company's revenues from its computer telephony product
line.
TeleVantage is a telephone system designed for small- and medium-sized
businesses and branch offices. The Company believes TeleVantage offers
functionality superior to that of a traditional standalone PBX. There can be no
assurances that competitors with substantially greater financial resources than
that of the Company will not develop their own software-based phone system
solutions and subsequently adversely affect the Company's ability to market or
sell its software-based phone system solution, TeleVantage.
TeleVantage could also face direct competition from companies with
significantly greater financial, marketing, service, support and technical
resources. Although the Company has recently partnered with TAIS, Dialogic (an
Intel Company), Compaq and IBM amongst others to deliver its software-based
phone system to small and medium sized businesses there can be no assurances
these partnerships will substantially expand the market presence of the
Company's software-based PBX, TeleVantage. The Company anticipates certain
competitors with greater financial resources will continue to make substantial
new investments in developing IP based and software based telephony solutions.
Thus there can be no assurance that the Company will be able to successfully
market or sell its own competing IP based or software-based telephony solutions.
COMPUTER TELEPHONY HARDWARE SUPPLIER DEPENDENCIES. The Company's
software-based phone system, TeleVantage, is designed to operate in conjunction
with voice processing boards manufactured by Dialogic, an Intel Company.
Additionally, Dialogic, an Intel Company is currently the Company's only
supplier of the voice processing boards that are necessary for the operation of
TeleVantage. If Intel Corporation becomes unable to continue to manufacture and
supply these boards in the volume, price and technical specifications the
Company requires, then the Company would have to adapt its products to a
substitute supplier. Introducing a new supplier of voice processing boards could
result in unforeseen additional product development or customization costs and
could introduce hardware and software operating or compatibility problems. These
problems could affect product shipments, be costly to correct or damage the
Company's reputation in the markets in which it operates, and could have a
material adverse affect on its business, financial condition or results of
operations.
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Additionally, Dialogic (an Intel Company) hardware failures could adversely
affect the Company's ability to ship and sell its own software products, damage
its reputation in the markets in which it operates, and could have a material
adverse affect on its business, financial condition or results of operations.
COMPUTER TELEPHONY CUSTOMERS AND MARKET ACCEPTANCE. The Company is
currently and will continue to invest significant resources in the development,
marketing and sales of TeleVantage, a software-based phone system. There can be
no assurance that the Company will achieve market acceptance of these products
whose PBX and related telephone needs have traditionally been served through
proprietary PBX and key system distributors and interconnects. The Company's
potential customer base for its TeleVantage product, small, medium sized
businesses and branch offices, have well established histories of buying
existing telecommunications products, including proprietary PBXs and related
products, and have found such products to be generally reliable. Moreover, large
companies such as Avaya Communications and Nortel have invested substantial
resources in the development and marketing of existing proprietary PBXs and
related products and maintain well-developed distribution channels. Accordingly,
the Company will face substantial market barriers and competitive pressures in
achieving market acceptance of its new software based PBX products. There can be
no assurance that the Company will be successful in establishing a critical mass
of qualified computer telephony resellers or that such resellers will be able to
successfully market TeleVantage in the volumes that the Company anticipates. The
Company's success in selling these products will likely be influenced by its
ability to attract and inform the highest qualified VARs and distributors and
interconnects on the features and functionality of these emerging technologies.
The Company's computer telephony products compete in a relatively immature
industry with as yet unproven technologies. The Company believes that there will
be an evolution toward open server-based telephony enabled applications from the
traditional proprietary PBX environment and that, in such a new environment,
software-based PBX systems will be widely accepted. The Company also believes
that there may be an eventual gravitation toward Internet Protocol
architectures. However, there can be no assurance that the current technological
innovations in the computer telephony industry will be widely adopted by small
to medium sized businesses or that telephony standards will evolve in a manner
that is advantageous to or anticipated by the Company.
TeleVantage currently runs only on Microsoft Windows NT servers. In
addition, the Company's products use other Microsoft Corporation technologies,
including Microsoft SQL Server. A decline in market acceptance for Microsoft
technologies or the increased acceptance of other server technologies could
cause the Company to incur significant development costs and could have a
material adverse effect on our ability to market our current products. Although,
the Company believes Microsoft technologies will continue to be widely used by
businesses, there nonetheless can be no assurance that businesses will adopt
these technologies as anticipated or will not migrate to other competing
technologies that the Company's telephony products do not currently support.
Additionally, since the operation of the Company's software-based phone
system solution is dependent upon certain Microsoft technologies, there can be
no assurances that in the event of a price increase by Microsoft that the
Company will be able to continue to successfully sell and market its
software-based phone system.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK. During the normal course of business Artisoft is routinely
subjected to a variety of market risks, examples of which include, but are not
limited to, interest rate movements and collectibility of accounts receivable.
Artisoft currently assesses these risks and has established policies and
practices to protect against the adverse effects of these and other potential
exposures. Although Artisoft does not anticipate any material losses in these
risk areas, no assurances can be made that material losses will not be incurred
in these areas in the future.
INTEREST RATE RISK. Artisoft may be exposed to interest rate risk on
certain of its cash equivalents. The value of certain of the Company's cash
equivalents may be adversely impacted in a rising interest rate investment
environment. Although Artisoft does not anticipate any material losses from such
a movement in interest rates, no assurances can be made that material losses
will not be incurred in the future.
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ARTISOFT, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to lawsuits and other claims arising in the ordinary
course of its operations. In the opinion of management, based on consultation
with legal counsel, the effects of such matters will not have a materially
adverse effect on the Company's financial position.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. 11 - Computation of Net Loss Per Share
No. 27 - Financial Data Schedule for Form 10-Q dated November 13, 2000
(c) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARTISOFT, INC.
Date: November 13, 2000 By /s/ Steven G. Manson
--------------------------------------
Steven G. Manson
President and Chief Executive Officer
By /s/ Kirk D. Mayes
--------------------------------------
Kirk D. Mayes
Controller and Interim Chief Financial
Officer
